Make It Last – Ep 92 – 5 Ways to Make Your Transition into Retirement Much Smoother

As you approach retirement you likely know that a great deal of changes will be made to your daily routine. Not only will you have to get used to the idea that you are no longer going to work everyday, but you will also have to get used to financial changes to your daily life. If you follow these 5 guidelines Victor has created it should make your transition into retirement a much smoother one.

Make It Last with Victor Medina is hosted by Victor J. Medina, an estate planning and Certified Elder Law Attorney (CELA®) and Certified Financial Planner™ professional (CFP). Through his law firm and independent registered investment advisory company, Victor provides 360º Wealth Protection Strategies for individuals in or nearing retirement.

For more information, visit Medina Law Group or Palante Wealth Advisors.

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Make It Last – Ep 92 – 5 Ways to Make Your Transition into Retirement Much Smoother

Click below to read the full transcript…

Announcer: Welcome to “Make It Last,” helping you keep your legal ducks in a row and your nest egg secure with your host, Victor Medina, an estate planning and elder law attorney and certified financial planner.

Victor J. Medina: Hi, everybody. Welcome back to Make It Last. I’m your host, Victor Medina. I’m glad you can join us for another edition of Make It Last here on WCTC 1450 AM. I am excited to talk to you today, because I’ve got a couple of subjects that I’ve been wanting to get to for a little while.

One of the things that we’re going to cover today are ways to make your planning for retirement easier. The second thing I want to do is recently there was an article that came out in “The Wall Street Journal” that I was alerted to essentially by a faithful listener out in the Chicago area.

A friend of mine who wanted to let me know that there was an article about annuities. It was really interesting if you dove through that, a lot of the preconceived notions about what annuities are and why people should like them or shouldn’t like them.

I thought it was great because I actually asked them a bunch of questions about the article before I read it and it was so well representative of the way that people are either misinformed about what the product is or properly informed but kind of ignorant about other areas. I’ll explain a little bit what I mean on that.

Basically, the idea is just people have this notion about it, and the notion might be right as to a very limited sliver of the way that it works, but at the end of it they may not know all of the other options that are available.

Anyway, before we get started with today’s show, a couple of really quick announcements. The first thing is that we had two successful seminars and workshops in our space.

I want to thank those of you that came out to attend that, especially a couple of you that are new that came just from the radio show. I wanted to thank you for doing that.

By the way, if you’d like to be alerted to other workshops that we’re going to be hosting in and around the area, it is important for you to continue to listen to the show.

If you’re listening live today, one of the things that I’m doing is, later this afternoon I have a speaking engagement at Homestead at Hamilton and that’s at six o’clock today, Wednesday, February 13th. This is all about getting your ducks in a row for your legal planning.

If you’d like to attend that, you can go ahead and reach out to Kelly Astbury at Homestead at Hamilton and see if they have any more slots available. Homestead at Hamilton is a living arrangement that I have featured on the show in the past.

One of the more novel ways of creating an assisted living type scenario, but there are independent houses that are in there, a lot about their activities. I was really impressed with the way that they had structured their thing. I’ll be doing that at six o’clock this evening, Wednesday, 13th.

I guess we’ll celebrate a little bit of Valentine’s Day going in there.

Another thing, if you’re not able to listen to us live and you want to make sure that you stay up‑to‑date on everything that’s related to the show, what you can do is you can subscribe to the podcast. We push this out.

Use your favorite podcast catcher out there in the world and you can go ahead and essentially, get every edition and episode of this show delivered to your phone, to your computer if you’d like.

That way you can listen to it at your heart’s content. Let’s jump right in. For many people, the idea of redesigning their investment portfolio and their financial life for retirement can seem overwhelming. They’ve done things one way throughout their entire working career and that’s worked out.

It’s worked out largely because they stockpiled a lot of money away into different retirement accounts, different qualified accounts like 401(k)s or IRAs. They’ve diligently paid off their debt. They’ve supported their lifestyle. They haven’t had to think through a lot of changes.

What they were doing was working. Because of the way that saving, and compounding, and investments work, they basically left well enough alone for the better part of 30 years, It worked out. It was fine. They ended up in a position where it looks OK.

During their working life, their standard of living was largely dictated by the amount of money they took home each and every month from their wages and their employment. When that check goes away, that is to say you retire, things can get a little bit more complicated.

What I wanted to do was help identify a few things that you can do to make planning for retirement, and the financial decisions that come with it, a little bit easier. What are the most important decisions that’s come along with retirement?

Should you have all of your debt paid off prior to retirement, or do you need to live on a budget? Whereas before, you may not have had as strict a budget. What’s the best time to retire? These are all questions and things that you should be examining as you approach retirement to make sure that you make the right decision.

I love making things easier for other people, and the idea of retirement planning sometimes flies in the face of that. Especially when we meet clients before we start working with them. It can seem complicated, even to the point of being overwhelming for some people when it comes right down to it.

It doesn’t have to be that way. I can help you with some tips, tools, and strategies that can help you make your retirement decisions during the financial planning obstacles that come along with it a whole lot easier. That’s my goal for here today in this segment.

Let’s make planning for retirement easier. I’m excited to share some things with you that will helpfully lessen the load and the burden that you feel while thinking about and working through the challenges of retirement and financial planning.

What I want you to do is make sure that you have a pencil and pad to take notes along the way. The thing is, too, if you decide that you’d like help in some way, you can reach out to us because this is something that we do.

What you would do is you’d call us at 609‑818‑0068. You’d reach out and speak to our intake specialist who would talk through with you the things that you’re trying to accomplish, make sure that you’re a good fit for us. Then you’d come in for essentially a complimentary retirement road map analysis.

We will have the opportunity to go through that. Again, if you’re interested in doing that with us, you’d do it at 609‑818‑0068, and we can get you started on that process. One of the reasons is why retirement planning can be difficult for people is due to the fact that so much regarding your life changes when you retire. Your regular daily routine completely changes.

I remember that when my mom and my dad retired, they were both school teachers for their entire career, which meant getting up at six o’clock in the morning, getting out the door if it was Monday through Friday and not the summer. They had their routine down.

When they faced retirement, a lot of that changed. Their daily routine changed and lots of things changed about making decisions for finances and in retirement. They were school teachers who had contracts with lockstep pay raises. It was very reliable to do their planning.

One of the things that worked out for them was that when they retired, they were able to make decisions about their retirement income that could continue that reliability of planning.

They were in one of the very few positions where, when they retired, they essentially would have a pension. That pension would continue to pay them for the rest of their life. Most of the people that run up against, excuse me, or that I meet, they don’t have that. They don’t have that opportunity.

Their income and their monthly cash flow changes radically, the way that they create income changes completely. What they spend and how much they spend changes and actually probably in the opposite direction.

Where’s their income and their cash, the way to generate monthly cash flow goes down and becomes harder as they stop working. Their spending goes up, because they got to fill that time with something.

As you get closer to retirement, it’s easy to understand how impactful this move can be to someone in their family. Rather than winging it, which is what I think a lot of people try to do, there’s this behavioral thing where people are unwilling to ask for help or to admit some weaknesses on it.

I understand that. I consider myself to be a really self‑reliant person, I feel like I can go out and I can make of the world what I need from it. Then it becomes difficult for me to ask for help.

I really need to get hit over the head, and sometimes make a mistake. More recently, I’ve been regularly going to a gym and working with a trainer. Now, look, in my prior life, I went to the gym. I knew what it was like to go to the gym, but I never really got the results that I wanted to.

I woke up close to 40, over age 40, I’m overweight, I’m not in shape at all, and I realized that was getting slapped over the head with this idea that I can’t make that happen on my own. I’m not capable of doing that. In fact, I need to ask for some help.

I went out and I got all these training sessions. I’ll continue on with that, and I invest in a professional that helps me with that. The tricky thing about getting into a retirement situation and trying to track it on your own or asking for help, winging it, is that we don’t have necessarily an opportunity to come back from some bad decisions.

At age 40, I could go back, I can hit the gym. Look, it was going to be harder than if I had put in those habits in place and got myself into shape in my 20s, but I’ve got time to get that done. I have the resources to get that done.

If I start winging it in retirement without professional help and guidance, one of the risks that I run is that if I make mistakes in the beginning component of it, I don’t have the opportunity to come back from those mistakes.

I can’t go back to work and make the same money that I did when I was in my prime earning years. If I make a mistake about withdrawal strategies and how to create retirement income, I can’t go back and make that money rematerialize or say, “Whoops, can I do a do‑over and start again?”

That’s why I think that it’s really important that people consider building a plan that they can follow and often working with a professional to do that. I have some ways to do that, and I want to talk about them on today’s show that your plan should address that can make this process easier on you.

Let’s set this up. Retiring brings on all of these changes. I want you to understand that the changes are real. We don’t want that to seem as monumental as it is in terms of the way that we live life.

We’ve moved phases. Phase one is an accumulation phase. Essentially, begins at a time you get your first real job and you start to save and accumulate money for retirement.

Whether that savings is in a bank account, in cash in your mattress underneath your bed, or 401(k) ‑‑ some combination of all of that stuff. Your goal is to try to accumulate as much money as you possibly can, in the time that you can.

For most people, whether they’re comfortable with risk or not, they are not only probably wiser to invest aggressively during this phase, but they wouldn’t even see the results of it if they weren’t comfortable.

What I mean to say is like, if they weren’t comfortable and they invested aggressively, it wouldn’t matter because as they continue to add more money, the roller coaster of what that account value might go up and down at the time.

It’s just going to fade into the background, because they have an extremely long timeline before they’re going to need that money and to access it to create income in retirement.

What they do is they live from their paychecks from their work. If they had debts, school loans, buying a home, left‑over credit card when they got started, they basically pay that debt down. They save some money into the point that they can get into essentially phase two.

Phase one is super, super long because we’re working for a long time. We’re providing for families for a long time. We want to feel useful, so we’ve gotten a job. We’re going to want to stay at that job.

I have a client of mine that is in their 70s and is reticent to let the job go, in large part because they don’t know what they would do with that time. Their health is keeping up and that’s good. As long as that happens, they want to keep their job.

We talk when we meet about, “What you’re going to fill that time with? Is there something else?”

We are not trying to lead this client to retirement if that’s not the decision that they want to make. We do want to make sure that they’re thinking through all of those different parts of the equation so that going into retirement doesn’t feel like it’s a major loss.

People can be in that first phase for a super, super long time. When they convert to retirement, they get into phase two. Phase two is we’re in distribution or preservation phase.

It starts when you retire and this is where essentially everything changes. You go from accumulating and saving money to deaccumulation or decumulation strategies. You go from having a paycheck from your employer to having paychecks from other sources like Social Security or a pension.

If those paychecks aren’t enough to live on comfortably ‑‑ and for most people they are not ‑‑ then you need to develop a strategy to take additional income from the money that you saved during phase one.

Look it, other things can pop up along the way, and you need to be prepared for them. Things like health insurance, deciding between a lump sum and a pension. Getting rid of debt entirely and whether or not you still need life insurance.

Many times, people are asking questions, “I have this policy. It was a term policy. They’re asking me to convert it. What should I do?” Those questions need to be addressed. On top of it all, you might need to consider a complete redesign of how it was that you chose to invest your money during the accumulation phase.

There are a couple of facets on that. You need to be addressing what your risk tolerance is. Where your money is held, whether they’re employer‑sponsored accounts, whether they’re in savings that you manage, and whether or not you have enough money to sustain the same standard of living now that you are on retirement.

Phase three, which is the next phase after that is inevitable for everybody. It, basically, is distribution.

By the way, I don’t mean distributing dollars to yourself when you’re living. That was phase two. “No, no. You’ve already talked about distribution.” I’m talking about what you leave when you die. Your loved ones are in line to inherit anything that’s left over in your account.

It makes sense to have a well‑thought‑out plan to pass assets on essentially in the most tax efficient and practically efficient way possible.

That’s where the marriage of legal and financial retirement planning comes together. It’s where estate planning starts to dovetail into your financial plan and why the two need to work together. There are a lot of advantages to thinking through tax qualifications, making sure that you’re not stuck in a regulatory or administrative setup, probate and things like that.

There are all reasons why you may want to adjust your estate plan to essentially work together with your financial plan. There is that last phase, and we deal with that as essentially everything that’s left over.

By the way, sometimes the plan includes ways of generating money when you do that. For our discussion today, I essentially want to focus on transition items that you want to think about going from phase one, which is the accumulation phase, to phase two, which is the preservation and income phase.

There are five specific things. By the way, these aren’t the only five, but they’re good for today that you should focus on, that are going to make it easier to help you make your retirement decision‑making tree and how you set up a plan just a little bit easier.

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Victor: The thing about it is this, if you choose to focus on these areas proactively, you’re likely going to be one step ahead of a difficult retirement planning process.

As you start to engage in retirement planning, when you see it on the horizon, thinking about these five things will help you deal with what would never be a difficult retirement planning process a little better. It’s going to seem a little easier.

I’m going to tell you what those five things are.

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Victor: Everybody, welcome back to Make It Last. I’m talking with you today about ways to make your retirement easier. We’ve talked about the two different phases.

Why should we talk about three? We talked about accumulation, which is phase one. Your preservation and income, which is phase two, and your ultimate distribution, which is phase three. What we’re focusing on is the transition from phase one to phase two.

I want to give your five things that are going to make the process easier. I told you in the beginning, notepad and pencil time.

Our first recommendation is essentially to have a cash emergency fund. One of the first things that you can do to make sure that when you retire that it’s easier, is that you have an emergency fund of cash that is accessible and available to you.

There are all sorts of guidelines out there that people have used to try to establish how much you should have put away. Some people use six months’ worth of your expenses. Other people have used a year’s worth of your salary.

Let’s make this a little bit easier. When you look at your bank account balance, is there a number that comes to mind that makes you feel confident? Is there a specific balance that you’d like to have that makes you feel comfortable attacking any sort of unpredictable or random expense that may pop up?

For some people, that number is as low as $10,000. For other people, it’s as much as $100,000. Whatever your number is, you should write that down, because that’s going to give you confidence that the rest of your plan is working the way that it should or, at least, that you shouldn’t worry if there are changes to what’s going on with the rest of the plan.

If you have that security blanket, then you’ll essentially be in a position to continue with your plan and not worry that you need to change it simply because different things have changed as a foundation. That’s a pretty good guideline for it, what makes you feel comfortable.

I know that when we do legal asset protection planning for individuals, one of the things that we’re trying to do is move money away from their individual name, essentially to an account that is protected, if they need long‑term care in the future.

We use irrevocable trust to do that. It’s a very common way to do that planning.

Then, we have to talk through people about how to set their investments in order to make that part of it work, next level planning, really important, really important, but it’s generally a layer on top of their retirement planning in order to make sure that all of these elements fit together.

One of the discussions that we have with people when we set that up is how much money do you want to leave in your name, as part of what we’re doing? What’s going to make you feel comfortable?

A lot of the answers to that depend on their age, their sense of their health, and the timeline for this planning to work. Many times, we’re talking about a five‑year timeline.

It’s a very similar analysis to the one that I suggested about your cash emergency fund. Looking for a bank of dollars that you can look on that’s immediately accessible that gives you confidence is a good way to earmark how much should be in your emergency fund.

The thing about it is, not a lot of people have this set up. There’s data that comes out from the Federal Reserve Board that essentially said that two out of five American adults can’t come up with 400 bucks in an emergency.

The median American household has less than $5,000 in their savings account. The bottom line for why we want to put this together, which by the way if this is you, we want to start to rectify that. You want to be in a position where you have that.

I can’t imagine what the sense of financial insecurity is in your life looking at that balance account knowing that if something were to happen ‑‑ a hot water boiler was to blow, or if you get into a car accident and you’ve got to buy another car for cash.

If you look at that and you have no cushion, you’re walking around with a lot of pain, a lot of pain. I don’t think that that’s fair, so we want to get you to a better position for that.

The reason why this works for our retirement planning is we want to be able to avoid drawing additional money from investment accounts when a random expense need arises. Try it that way.

You don’t want to be taking withdrawals from investments for every single unexpected expense that’s going to really cut into your plan. If you want to have a plan that you can reasonably stick to, that plan has got to have expansion room.

If you have a random expense need, your cash emergency fund allows you to absorb that in a way that doesn’t impact you. It doesn’t force you to change the rest of your plan. First strategy is definitely to have a cash emergency fund. Second strategy is get through debt payoff.

We want you to focus on your debt and your liability. I think it’s obvious to most that having debts payed off prior to retirement should be a top goal. If you’re somebody that has already achieved that or you’re on your way to achieving that, then congratulations.

In my experience meeting with individuals and families, there are many people that aren’t quite there yet. I consult with folks who are in retirement, who entered retirement with a mortgage, credit card and loan debt. They are paying off a home equity loan.

They want to know whether or not they should continue to do that. There are a lot of questions around it. While it’s not advisable to enter retirement with this kind of debt still lingering, sometimes you don’t have a choice.

If you don’t have a choice in your scenario, you can still come up with a plan that helps you address it in conjunction with having a plan for retirement, and specifically retirement distribution planning.

One of the ways that you can do this, address your debt situation, is to think about the checks that you have to cut on a monthly basis to pay these debts.

For example, you might send in $1,500 a month to pay your mortgage, and another $1,000 a month to pay down the credit card balance that you’ve built up, and let’s say another $500 to pay down a home equity line, the damage to help you with in addition, or an update to your kitchen, which you haven’t done for 25 years.

Your total cash flow out is about $3,000 a month. It leaves your pocket and it goes to someone else. Start to think about what it would be like, if you had those debt paid off and that $3,000 a month you were sending out the door stayed in your pocket.

How much more comfortable would you be spending money in your retirement life, knowing that the draw on it, the need for that is gone or greatly reduced. If you do some examination on this, the average household is almost $25,000 in non‑mortgage debt. That includes credit cards and other things that it’s in there.

If you’re planning to retire and you are setting up your plan, you’re discussing your strategy with your financial advisor, make sure that you have a full list of the debt that you owe, and the payments that you make, so that you can create a plan that is designed to help you pay these things off as quickly as possible.

Then you’re going to be able to see the adjustments that go to your plan once you don’t have that draw. When you’re not saddled with that boat anchor around your ankle, dragging down your need to distribute money out. It might be worth a short‑term sense of uncomfortableness to pay all of this stuff off, in order to get it out of the way.

The longer that you have that bigger draw need in your retirement life, the bigger there is a risk to you being successful in retirement, because there are all kinds of risks that are attending to needing money for a longer period of time ‑‑ the longevity risk, the market risk, things that can go up and down, your healthcare needs.

There are all of these outside risks that are impacting whether or not you’ll be successful in retirement. If you can eliminate debt from that, in other words, if you can shrink the amount of draw on your retirement so that you need less, you’re going to have a greater chance of withstanding the way that those risks impact your retirement.

I hope that lands for everybody, because one of the things we want to do, essentially dealing with your debt, is make sure that we get this relentless draw, because the bank always wants its money. The credit card company always wants their money, or things get worse.

What we want to do is we want to get that out of the way so that you regain control about how much money you need to be pulling out, and where you need to spend it. Strategy one was a cash emergency fund. Strategy two was paying off your debt. Strategy three is to focus on your retirement life and define what that’s going to look like.

If you’re considering retirement, you will certainly imagine what your new life is going to look like. You can imagine, probably not getting up and going to work. That might be like the number one thing that you’re thinking through. Have you really ever broken it down in terms of what you will be spending all of your newfound time doing?

Seriously, if you were working Monday through Friday from 8:00 to 6:00, and all of a sudden you wake up Monday after you retire and you don’t have to go into work. What are you going to do? Are you going to sit down and relax? Are you going to fix up the house? Are you going to go traveling? Are you going to visit your family? You’re going to go golfing?

What’s related to that question, what’s embedded in that question is what is that going to cost you? What you’re going to be spending your time on. What is that going to bring out of your account?

You might think about this as your discretionary enjoy expense line item. It’s just as important for you to plan for it. Considering this expense as is your most basic expenses, like food, your utilities, taxes. What we call our necessary expenses. We need to line items for that.

A good task to run through prior to retirement planning and investment discussion with a financial advisor, or if you’re trying to piece it through together on your own, is to think what your monthly expenses might look like when you flip that switch.

Creating a budget might be tough for somebody that always had enough income, to where they had everything that they needed to live on and they grew savings. Basically, they never needed a budget because they could live through just having money show up every two weeks. That can be a hard exercise to have somebody go through.

This is where the behavioral finance element comes into it. It can seem restrictive in the sense that, if you’re creating a budget, it means that you’re saying no to things, or you are locking yourself into one particular plan with one particular strategy.

I don’t want you to think about it that way, because I’m concerned that if you start thinking about it that way, you’ll never get done outlining what the border needs to look like, the edges need to look like.

When you develop your budget for retirement life, I don’t want you to think that you have to live by this budget and monitor it every month. As soon as you hit the limit, you’re done spending for the month, it’s more of an exercise that will help you determine how much monthly income and cash flow you’ll need to make sure that you’re happy and content in retirement.

We want to think about this as big Jersey barriers that are on the highway. You can move back and forth between the different lanes, going fast, going slow, but we don’t want you to run off of the road.

The fourth strategy is to develop a plan that details as much as possible into what this money’s supposed to be used for.

Now that you have got detailed notes on your emergency fund, your debts and your liabilities, and your cash flow needs, you need to develop a financial plan that helps you address these items.

What’s related to that is how to position your retirement savings to help support everything that you’re trying to do, or at least learning whether or not what you’re trying to do is possible.

A well‑thought‑out financial plan essentially needs to be constructed prior to making any financial investment decisions. It needs to be done prior to taking withdrawals from a 401(k) or deciding to roll it over to pay off your debt, to turning on Social Security, whether or not to buy an annuity, whether or not to change your investment strategy, change financial advisors.

All of those things are going to be related to creating a plan. By the way, you may want to change your financial advisor if you’re not talking to them about a retirement plan.

I’m essentially saying don’t start to pull the trigger on recommendations that are all these one‑offs until you understand how it fits within your plan. Here are the things that I think that plans should address.

Your plan should address how much money you have in savings, so collecting that all together. How you’re going to pay off your outstanding debts. When you’re going to turn your Social Security on, or when you’re going to turn your pension on, or how you’re going to collect that.

How you’re going to cover your health insurance costs. Are you going to go Medicare only, or are you going do Medicare with a supplement, those types of things?

How much monthly income do you need, and how much of that income will come from paychecks like Social Security and retirement pensions? How much income are you going to need to supplement from your retirement portfolio in order to produce the supplemental income that you need to create the paycheck that [inaudible 30:32] ?

You need to address inflation, rise of income needs as time goes on. The cost of a gallon of milk today is less than what it will be in the future, but you know what? Your dollars that you’ve saved are it. That’s it.

If you plan on only having one income for the rest of your life and that income is not going to change, that’s not realistic. Inflation is going to impact this, and you’re going to have rising income needs based on the fact that things are going to be more expensive.

Another thing that’s part of a plan is how much risk tolerance do you have? More importantly, because I always think that this is the thing that’s overlooked, is everyone talks about risk tolerance like, “Well, what’s your risk tolerance, and is your portfolio a match to your risk tolerance?”

That’s one element of the analysis, but then another element of the analysis is how much risk does your plan need to take to be successful? By the way, answers to that question can be on both ends of the spectrum.

It could be that your plan needs to take far less risk than you’re comfortable taking in order to be successful, and that we need to ratchet that down, or it’s reasonable to ratchet that down, because we don’t need to be taking so much risk, or the opposite could be true.

Your risk tolerance could be like, “I don’t want to lose a dime,” but you’ve got to put money at risk at the table in order for you to be successful. You don’t want that money to be the money that you need immediately.

You need to think about that strategy, that your goal requires a risk tolerance that’s greater than what your personal risk tolerance is. You need to know the answer to that.

You need to be essentially thinking about this in the context of where you’re going to be drawing money from, because there are going to be buckets of money that need to be protected from the fluctuation of markets the way that they are.

We had this downturn at the end of the year, and February’s gains were all lost last week. All of those things are in play, and you need these buckets of dollars that are essentially protected. You need to think about risk tolerance in that context.

Finally, what combination of financial vehicles should you be using to position your retirement nest egg to cover all of these needs and objectives? Once you understand where everything needs to go and how you need to plan for the future and can keep projecting that out, then the next thing that you need to do from that is say, “OK, what tools do I have available to accomplish those goals?”

For many people, it’s not going to be a single tool that covers everything. It’s not going to be one investment portfolio that’s going to cover 100 percent of what you need. It’s certainly not going to cover your long‑term care expenses, because there’s nothing in there about long‑term care insurance and how you set that up.

It’s important to think about the various tools and strategies that you’re going to need in order to make that work.

Here is where the professional becomes important, because the professional who specializes in retirement planning is going to be able to draw from their knowledge of what financial vehicles are available and which ones work, and which ones serve your best interest and all of that fun stuff. They’re going to be able to put them together in order to put a cohesive plan in place.

I can’t tell you how many people we’ve met with, that it’s eye‑opening that we can draw from all of these tools and set up something that is comprehensive to their needs and isn’t just, “Well, all I do is I sell hammers, and you’re a nail, and I’m going to keep slamming down on you over and over again because it’s the only thing I know how to do.”

We need a more nuanced approach for that. The last thing on that is related to these financial vehicles. You have to understand them.

To be able to properly articulate whether or not the vehicles that you put your money into help accomplish your goals, you have to gather a base‑level understanding about how these different vehicles like mutual funds, stocks, bonds, ETFs, annuities, CDs, how all of these things work. What they can do for you and what they’re not going to do for you. What are their limitations?

A lot of the confusion people have regarding these different financial vehicles is basically twofold.

First, unless you have spent a lot of time studying, or you’ve spent time working in the industry, understanding the details for each of these vehicles can be difficult. People tend not to have quite enough working knowledge about how these things operate in order to be making sound and informed decisions.

By the way, we shouldn’t fault them, because this is not their day job. That’s not their gig. If it’s not their gig, it’s OK for them not to know that. That’s one of the level of confusions on that.

The second layer of that is that there’s too many financial advisors that either tend to talk over the heads of their clients as opposed to bringing the conversation to the kitchen table, so to speak, or they gloss over it altogether.

They suffer from two different sins, the financial advisors that I’ve run into.

One of them is that they egghead the discussion, or they try to sweep it underneath the rug. It’s important that any financial advisor that you work with takes time to not only explain the vehicles in a way that you can understand, but they do so thoroughly. They are happy to continue to have those discussions over and over again.

The truth of the matter is that you may not lock in to all of the details in meeting one, two, three, or even once you’ve set them up and you want confirmation when you come back, be like, “What was that again?” I get it. That’s my job.

My job is to serve as a form of a translator so that when you need to understand what you’re doing, or when you need to understand what the impact of your various decisions are, that you do so with all of the information that’s on there.

It’s one thing to go through the first four steps that we’ve talked about ‑‑ emergency funds, paying off debt, all of those things, right? ‑‑ and how doing so is going to make your decision regarding retirement a little bit easier.

It’s another thing to gain a little bit of knowledge prior to signing on the dotted line for anything you choose to do. That quest for knowledge should be a two‑way street between your advisor and yourself. Your advisor needs to be looking for ways to know what it is they’re supposed to be providing for you.

Then you need to be essentially asking or getting the information. You need to make informed decisions. Those are the five things. Again, check your pad and paper.

[background music]

Victor: We’re talking about a cash emergency fund. We’re talking about debt payoff. We’re talking about focusing on your retirement life to find what it’s going to look like, develop a plan with as much detail as possible, and understand your financial vehicles.

Now, listen, when we come back, I’m going to cover a Wall Street Journal article that just came out discussing annuities because that tends to be one of the biggest questions that we get all the time.

I want to talk about that article, pull it apart, see what’s right about it, what’s wrong about it, and what you can do about it. Stick with us. We’ll be right back on Make It Last.

Announcer: Just about every working American stays focused on the ultimate goal, retirement, but planning for it can come with a lot of uncertainty. Do I have adequate savings? Have I invested enough? Have I invested too much? What’s the right thing to do?

If you’re one of the millions of Americans asking these questions, let financial expert, Victor Medina, help you make sense of it all. Victor is a certified financial planner and retirement income specialist who can help you set the strategy with a unique planning process that centers on you.

By taking an in‑depth look at your retirement timeline, goals you want to achieve and what you have saved, Victor and his staff can help you figure out how to get the most out of retirement. Retirement is the biggest financial decision you will make.

Putting the right plan in place and sticking to it is the smartest decision anyone can ever make. To learn more, visit Private Client Capital Group online at, and start down the path of securing your total wealth today.

[background music]

Victor: Welcome back to Make It Last. We spent the first part of the show talking about ways to make retirement easier for you. I want to take this last segment before we quit for today to talk about a Wall Street Journal article that came out on February 10th, so just a few days ago.

It was titled, “Why Retirees Are Wary of Annuities.”

One of the things that it does is talk about what people’s preconceived notions are about annuities. I want to talk about where the article gets some things right and if they don’t get it wrong, then one of the things that they’re doing is essentially overlooking, giving more information.

Look, I’m not crucifying this article. It’s fine. It went up there. We speak in very detailed conversations with our clients about where annuities should fit into their plan, if they fit at all. We do go through that. I want to talk about the based setup and then what I think you should know.

You’re going to get the straight talk here with me because what they want you to know is a very top level thing, and they’re just doing a survey. What I’m giving you is the information that is actionable, based on what you’ve got in your life.

Here’s the thing. A lot of economists, financial advisors, people who do retirement planning have recommended that retirees worry about outliving their assets. One of the ways they can do that is consider forms of lifetime annuities where the lump sum that is used to purchase a policy is essentially converted into monthly income that lasts their entire life.

Now, if you look at the way people have bought into this or not, Americans tend not to have much of an appetite for it. If you look at one of the research institutes that’s in there, they have bought about 40,000 annuities in 2017. That’s about 10 annuities a day.

Considering that there’s roughly 10,000 baby boomers retiring every day, that means only about one percent of retiring Americans actually buys a lifetime annuity. If you’re trying to examine what accounts for the lack of this demand, I think there are a couple of things.

Let’s go through what the article says. The article goes through a paper done at UCLA and at Duke University. One of the things that they did was surveying 900 subjects between the age of 40 and 65. They asked them a whole host of questions. Their marital status, and income, to whether they wanted to leave something behind.

They also measured their risk tolerance and their level of financial literacy. Then they looked to see whether or not the variables were correlated to a willingness to consider annuities.

The thing about it is that none of the factors were predictive. Whether or not they were married or not had no correlation to whether or not they wanted to buy an annuity. Or if they looked at their level of financial literacy, that had no bearing on it.

As they dove deeper, what they found what predicts the interest in annuities, is the person’s sensitivity to an issue of fairness. When the researchers started asking subjects questions about fairness in relation to annuities, such as it’s fair that the insurance company is allowed to keep the excess funds if a person dies.

Those who were most sensitive were also far less likely to consider annuities for their retirement.

This research builds on prior work showing that perceptions of fairness can partially explain some of the long‑standing economic anomalies in work that was done before scientists developed a series of questions that can help assess a person’s sensitivity to considerations of fairness.

While the traditional economic theory assumes that a higher demand should lead for higher prices, 82 percent of the subjects who were analyzed thought that if something was unfair in terms of short‑term spike and demand, then they wouldn’t go and do something.

It seems that the similar perception of unfairness is also influencing the demand for annuities. When the researchers offered the subjects annuities whose terms were exceedingly generous, that they paid out far more than the subjects paid, those who were sensitive to fairness still rejected the offer.

It suggests that their dislike of annuities wasn’t dependent on the details of the policy, but stemmed from an aversion to a shared risk model. Before I get into any more detail on this, we need to understand that the type of annuities that they were examining were what we call single premium immediate annuities.

What that means is that you give the insurance company a lump sum and they start paying you out in income immediately. The payout factor for that, how much you get for how much you give, tends to be higher than just what it would be a distribution of your life expectancy. What they’re doing is they’re assigning something called mortality credits to your payout.

Mortality credits is just a really simple way of saying they’re going to pay people who die before you, and we don’t have to pay them their money. Since they don’t have to pay them their money, we can pay you some of their money. The mortality credits is really just about the way that we assign a shared‑risk pool.

There’s some benefit to thinking about lifetime annuities. I don’t tend to use them in my planning very much for the very same reason that the article goes into fairness. I also don’t believe that it’s fair that the insurance company keeps all of the extra money, even if there’s a good chance that you’ll get paid out more.

Sometimes we want to hedge this situation and say, “Look, we’re willing to take a slightly less payout, a lower payout, on this in exchange for knowing that we’ll get all of our money back at some point in time.”

Here’s the wrinkle of this. The wrinkle of it is that that solution tool, the thing where we get to a fairer solution that at least gets you back a hundred percent of the money that you gave the product, it’s an annuity.

It still is an annuity. It just isn’t the kind of annuity that is this patently unfair version that people don’t like. One of the things that I would take issue with in terms of the way the survey was done is that they examined a person’s financial literacy, but they didn’t examine the financial literacy as it related to annuities specifically.

Annuities come in multiple forms and flavors. It’s one of the reasons why it is one of the most misunderstood financial tools. It’s one of the reasons why it’s one of the most abused financial tools.

There are a lot of people that are using the nature of the confusion around it to really not serve their clients very well. I’m kind of mealy‑mouthing about it like, “They screw their clients.” They do so regularly because these are hard products to understand.

One of the things that becomes essential is working with somebody that works in your best interest. Then they’re recommending something that works for you.

Because the general public doesn’t understand that there are multiple kinds of annuities out there, their perception of whether or not annuities, like big‑A umbrella covering everything, are fair or not, becomes skewed by their lack of literacy around that tool.

That was my biggest problem with this Wall Street Journal article. It took the definition of annuity and applied it as though it covered absolutely everything. That it was a blanket that you could throw on top of absolutely everything out there that’s called an annuity.

That couldn’t be further than the truth. Look, there are some annuities that will guarantee principal value for the lifetime of the contract.

If you put that money in there with no fees, with no expenses, if you leave that money in there, you’ve got one guarantee that it will never lose one dime, even though it is essentially with a chance to make some more money. It’s at risk. We call a risk if it has the opportunity to grow. The only risk of that volatility will happen is upwards.

There are those annuities out there that exist. At the same time, they’re called an annuity. They’re issued by an insurance company. At the same time, there are annuities in which the principal value is not guaranteed at all. It could lose all of its value. You know what? It’s still called an annuity. It’s still issued by an insurance company.

By the way, just to make things more confusing for you, both kinds of those annuities can be issued by the same insurance company. The same insurance company can offer both flavors of annuities. If in your mind, you’re trying to define annuity as being one thing, it’s too limited. It’s too limited to really serve a valuable purpose.

We need to talk about the difference between a variable annuity and a fixed annuity, a fixed annuity and a fixed indexed annuity, an income annuity and a deferred income annuity, a lifetime income annuity and an income rider that provides lifetime income but principal payout if you die too soon.

These are all wrinkles on there. I don’t envy being in a client’s position that doesn’t understand this.

They are then subject to the whims, to the approach, to the integrity of the advisor that they’re working with. The thing about it is that, majority of advisors that are out there are held only to a standard that says, “They don’t have to work in their clients’ interest. Good enough is good enough.”

By the way, if it pays them more money, pays the advisor more money, they can recommend something that’s not as good for their client. That is the majority of the way that advisors are, watch this one, obligated to work for their employer. It’s not even that they have a choice.

They have to recommend whatever the employer is telling them to recommend as long as it’s simply what they call suitable. I don’t envy clients being in that scenario because it’s really hard to distinguish between the advisors that are going to recommend things that are in your best interest and those that don’t.

There are so many situations that I walk into reviewing existing plans and going to people, “Why do we have this here? Who recommended it? Do you understand what this is?” I have to do two people’s jobs. I have to do the job of the other advisor in explaining to them what they’ve got. Then, I have to do my own job to explain to them what they need, and why it’s better for them.

In this scenario where people are trying to define what an annuity is, you have to question some of the underlying base knowledge that they’re assuming that you have for this scenario. Like in the Wall Street Journal article, “An annuity is not an annuity is not an annuity.”

There are multiple different kinds. There may be one that you will believe is patently fair, and that works for you, and so just cut right into the heart of the argument of the article.

People’s sense of fairness may drive their decision to buy an annuity. As long as they are properly educated about what different kinds of annuities are and what they do, they could be in a scenario where they choose to buy one, even when they have an innate high sense of fairness because, in fact, it’s fair and it is good for them.

If you read the journal article, now you’ve got a new perspective on it. If you had a preconceived notion about an annuity and buying one because of the way that you had a sense of fairness, I’m hoping to open your eyes a little bit, just a little bit on that.

By the way, if you know of somebody that’s talking to you about these subjects, one of the things you should do is probably share with them this episode and give them the opportunity to go ahead and learn the same thing that you have learned along the way.

Unfortunately, I’m out of time for today. My goal here was to make things easier for you when it comes down to planning for retirement and helping you to understand the different financial vehicles.

The last thing that I ended on with the “Making Retirement Easier Planning” segments was that you have to understand your financial vehicles. This segment is helping you understand that.

If you’re interested in learning more about that, and you want more guidance, let us help. Let me help you examine those five steps in detail.

What you can do is you can contact us at the firm at 609‑818‑0068 and meet with somebody on our team to come and talk about a retirement road map strategy, and get yourself on the path to making these things easier for you. You got to call us. You got to call us at 609‑818‑0068. Schedule that appointment.

Again, if this is a subject that you really enjoyed, and you think somebody else will, too, what you can do is recommend that they subscribe to the podcast. Get the podcast on their phone. You get it on your phone. Share it with them, and that way they’ll have this episode. They’ll have next week’s episode. It will automatically be delivered.

They can get this week’s episode just by going back into the archives. We’ve got 90 something shows in there. There’s going to be something there that you probably want to learn more about. You can dive into the library for that.

Then last thing is if you are free this evening and you want to learn more about how to get your legal ducks in a row, you can come and see me speak at Homestead at Hamilton.

That’s in Hamilton Township in New Jersey. That’s out by Kuser Road. If you’re interested in doing that, you can contact Kelly Astbury from Homestead at Hamilton and see if they have any more space.

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Victor: By the way, if you do attend, I’m going to give away a copy of my first book, essentially, “How to Get Your Legal Ducks in a Row.” That’d be good for you as well.

That’s it for this week. I’m looking forward to seeing you on the radio or listening on the radio. Joining me [laughs] on next week’s show on Make It Last, where we help you keep your legal ducks in a row and your financial nest egg secure. Catch you next week. Bye‑bye.

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This radio show is intended for informational purposes only. It is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual situation.

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